Opinion

How to Keep Clients Focused on the Long Term

Damian Ornani is the CEO of Fisher Investments, an $90 billion RIA serving large institutions and high net worth individuals globally.

You’ve probably heard about bitcoin and other cryptocurrencies recently. Hard not to. The media frequently reports cryptocurrencies’ sky-high returns, sharp declines, snazzy technology and regulatory intrigue. Even some celebrities have dabbled in the space, adding to the publicity. Considering the bull market has been running for more than eight years now and sentiment is starting to warm on the whole, investors have a growing appetite for higher-yielding, riskier investments. However, this desire to invest in cryptocurrencies smacks of fad chasing: a common investing error.

As an advisor, one of your biggest value-adds is keeping clients focused on their long-term investment goals and helping them avoid these traps.

Fads Come and Go

While cryptocurrencies dominate headlines today, investors have chased other fads throughout this bull market. Plays on artificial intelligence technology cycle in and out of popularity. How about when drone technology was hot? Or 3D printing? You may remember taking calls from clients who wanted in on some prominent social media companies’ IPO several years ago, too.

But the technology sector doesn’t own the fad space. Master Limited Partnerships (MLPs) — which invest in a subset of the energy sector — enjoyed a big run-up in 2014, right before oil prices plunged. Silver joined and even eclipsed its more popular cousin, gold, for a spell in 2011, before prices peaked — and tanked. And last year, the Global Industry Classification Standard (GICS) folks broke real estate out of the S&P 500’s “Financials” designation, largely due to the hot recent performance of REITs.

The Next Big Thing?

Many investors seem perpetually engaged in a search for “The Next Big Thing.” They figure if they can hit it big on the next must-have widget, it’s a fast road to riches. Sometimes that leads them to snap up something with hot recent returns. Other times it’s hunting for what they project to be the next big fad. But this is basically speculation either way — low probability and unlikely to be repeatable in the long run. If your client winds up on the wrong side it can greatly harm their long-term financial health.

Generally speaking, long-term returns depend more on asset allocation — the portfolio’s mix of stocks, bonds and other securities — than any individual selection. One position shouldn’t make or break a globally diversified portfolio – and more importantly, successful investing doesn’t rely on finding “The Next Big Thing.” Rather, investing is a long, gradual journey that focuses on finding paths likely to yield success in reaching your specific goals.

Plus, “The Next Big Thing” is devilishly hard to pinpoint ahead of time, though folks peddling such opportunities abound. Too many investors get caught up and eschew diversified, long-term oriented portfolios in their hunt. From an individual investor’s point of view the payoff isn’t just in returns. Buying into the next hot investment also provides bragging rights and pride accumulation — “evidence” of smarts — that can be just as attractive as portfolio growth.

It’s a Trap!

An increase in fad chasing isn’t surprising given where we are in today’s bull market. As bulls run longer and investor sentiment becomes more confident, greed grows, too. Earlier in the market cycle investors constantly feared old ghosts would emerge and trip up stocks. Though these concerns still exist, improving sentiment has investors seeing more and more “can’t miss” opportunities, and they get a new fear: the fear of missing out — FOMO, as my millennial employees might phrase it — regardless of the risk.

As a financial advisor, one of your core roles is keeping your clients from giving in to these emotions and acting rashly, like making a big speculative bet driven by the media’s latest headlines. This means you must be willing to have difficult conversations that remind your clients why they are invested as they are. While not easy — it would be simpler to just acquiesce to your client’s demands — you do your client no service by acting as a “yes man.”

Advisors best serve their clients by reminding them that investing is a long journey that above all requires discipline, even if “everyone else” seems to be making money from the latest sensation. However, by sticking to their carefully constructed path, your clients are more likely to reach their investment goals — and that is the core of why they hired you in the first place.

This counsel is even more relevant today. Our research indicates we are likely in the final third of the bull market cycle. Dour investor sentiment has persisted for years but has started warming and becoming more optimistic. We believe the bull market still has fuel to run for the foreseeable future but more optimism also means an increase in greed. Some will accumulate pride, having appreciated good returns in the recent past. Financial advisors must be willing to help clients combat that greedy emotional impulse with rational logic.

Investors are often their own worst enemy and if you can prevent them from committing self-inflicted harm you are providing a tremendous service. Remind them: Pride goeth before the fall.